Charity taxation and the Charities Act review

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The charitable sector and its supporters could be forgiven for feeling a little overwhelmed by a recent rush of reviews and reforms impacting on the sector.

The final report of the Tax Working Group (TWG), released on 21 February, affirmed the TWG’s recommended agenda for a review of charity taxation matters, and the Minister of Revenue has latched on to certain items on that agenda with marked enthusiasm.

The TWG’s final report has then been quickly followed by the long-awaited Charities Act review discussion document - Modernising the Charities Act 2005 - which was released on 26 February and calls for submissions by 30 April.

Meanwhile, IRD has pushed through a number of “remedial” changes to charity and not-for-profit provisions in the Income Tax Act and the GST Act that will soon be enacted, and continues to aggressively target certain taxpayers’ donation tax credit claims.

TWG agenda for review of charity taxation matters

Our previous update on the TWG's interim report highlighted key charity matters that the TWG indicated should be on the policy agenda - first as part of the DIA-led Charities Act review, and then as part of the IRD-led Tax Policy Work Programme.

The TWG’s final report substantially affirms the indicative agenda for the review of charity taxation that was set out in the interim report. Specifically, the final report:

recommends that the Government periodically review the charitable sector’s use of the effective subsidy that it receives by way of tax concessions;

supports the review of the tax treatment of the charitable sector, which focuses in particular on businesses, that is included on the Tax Policy Work Programme;

notes that some submitters perceive the current income tax exemption for charities’ trading operations as conferring an unfair competitive advantage - but also casts some doubt over whether this perception is well-founded;

highlights for review what it sees as the more important issue in relation to tax-exempt charities, namely the extent to which they accumulate surpluses (including reinjecting such surpluses into their investment or trading operations) rather than distributing or applying surpluses for their charitable purposes;

recommends Government consideration of specific, tighter regulation of privately controlled charities, particularly in relation to governance and distributions;

recommends Government consideration of tighter income tax rules in relation to entities that are deregistered under the Charities Act; and

recommends a review of the GST concessions for charities and non-profit bodies, and possible limitation of such concessions to Charities Act registered charities.

As with the interim report, the final report does not focus at all on any tax measures to support the charitable sector.

In relation to the TWG majority’s highly publicised recommendation to extend the income tax net to include capital gains, the final report does not explicitly deal with the position of charities but it is implicit that existing income tax exemptions for charities and others would apply. The report also specifically proposes that gifts to entities that qualify for donation tax incentives should not be taxable events under the recommended capital gains tax regime.

The Government will not fully respond to the TWG’s final report until April 2019, but in relation to charity taxation the Minister of Revenue has already made it crystal clear, in his speech to the International Fiscal Association’s March 2019 New Zealand conference, that charity taxation is to be reviewed. In particular, the tax treatment of charities’ trading operations and charities’ accumulation of surpluses are top of mind for the Minister.

In the first instance, aspects of both of these issues are being looked at as part of the Charities Act review, notwithstanding that the tax exemptions linked to Charities Act registration are ostensibly excluded from the review.

The Charities Act review discussion document

The Charities Act review is not a first principles review of the charities registration regime and its narrow scope has been criticised by many, including the New Zealand Law Society. The “charitable purposes” definition and various other matters are excluded.

However, despite its narrow scope the matters covered by the review are significant. And the importance of charities getting to grips with the survey-type discussion document and having their say on these matters is heightened by fact that the current consultation process is the pre-cursor to an amendment bill being introduced to Parliament later in 2019.

This is a ridiculously tight timeframe for legislative reform that affects, based on current registration numbers alone, more than 27,000 New Zealand charities.

From a tax perspective, the discussion document, like the terms of reference that preceded it (as discussed in our earlier Charities Act review update), somewhat disingenuously reiterates that tax exemptions for charities registered under the Act are out of scope.

This is disingenuous because, ultimately, every aspect of the review that relates to eligibility for registration and compliance obligations that need to be met to maintain registration has a potential impact on access to the relevant tax exemptions (and also access to donation tax incentives). Moreover, the discussion document itself acknowledges that it picks up some of the tax-related issues identified by the TWG in its final report.

Notable aspects of the review on this front include the discussion documents’ statements and questions for submitters regarding:

monitoring and/or regulation of registered charities’ accumulation of their assets/funds;

registration and reporting requirements for charities involved in businesses and in particular “unrelated businesses”, ie businesses undertaken to generate profit for an entity’s charitable purposes rather than to advance such purposes directly; and

advocacy (including advocacy relating to law and policy and, more generally, promoting particular viewpoints on issues) by registered charities - an issue that will also no doubt be a key focus for the Court of Appeal in Family First NZ’s impending appeal hearing regarding its eligibility for registration.

Charities Act changes in any of these areas would effectively impact on the scope of the charity tax exemptions and the donation tax incentive regime under the Income Tax Act.

DIA-led public meetings on the Charities Act review and the discussion document are scheduled nationwide during March and April, and submissions are due by 30 April.

While the charitable sector may understandably be focused on the Charities Act review and the TWG’s charity-related recommendations, IRD continues to chip away at the existing tax concessions available to charities and other non-profit bodies.

This includes impending “remedial” changes to tax concession provisions in the Income Tax Act and the GST Act and ongoing targeting of certain taxpayers’ donation tax credit claims, as previously outlined in our 2018 spotlight on charity tax concession issues.

There have been some notable recent developments on both of these fronts.

The Finance and Expenditure Select Committee has reported back to Parliament on the tax bill that includes the relevant “remedial” changes, and the bill has been passed by Parliament. The so-called remedials have been retained, but:

the start date for changes requiring all entities using the charity business income tax exemption and requiring IRD approval as a prerequisite for donee organisation status has been pushed back to 2020 (the same as the start date for the change requiring all charitable donee organisations to be Charities Act registered); and

important changes have been made to the new specific anti-avoidance provision for donation tax credit claims.

Important GST changes in the bill relating to the input tax concession for GST-registered non-profit bodies have also been affirmed.

IRD has snuck into the bill a further “remedial” change to the donation tax incentive provisions, and the Select Committee has accepted the change, to counteract a recent High Court’s decision regarding donation tax credits - notwithstanding that IRD is also appealing the decision. The High Court held that forgiveness of debt in favour of a donee organisation is a “monetary gift” that can qualify for a tax credit, but the bill will retrospectively change the relevant provision so that it refers to a “gift of money”, to exclude debt forgiveness.

The High Court has also recently issued another controversial decision regarding donation tax credits, this time determining that certain church members’ offerings to the church’s New Zealand trust to support the church’s missionary work are not “gifts” that qualify for a tax credit - if the donor is a missionary, or the parent or grandparent of a missionary, making the donation in response to the missionary undertaking service for the church. This decision is also being appealed.

These developments do not have the same high profile as the TWG report and the Charities Act review, but they have significant implications for a wide range of charities and other non-profit bodies.

If you would like additional information and advice on the TWG’s recommendations, the Charities Act review and other charity/not-for-profit developments and their implications for you and your organisation, the Simpson Grierson Tax Team would be happy to help.

For further information, Simpson Grierson clients can also attend our upcoming Insights Session on Charity Taxation and the Charities Act review, scheduled for 9 April. Register for the session here.